Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Australia’s proposed MSME insolvency reforms – an international perspective

Australia’s draft legislation to implement its announced MSME corporate insolvency reforms may have drawn more on international than local thinking, in particular in relation to the debtor in possession model long resisted in Australia. 

The proposed reforms compare reasonably well with international guidance which is in the process of finalisation through UNCITRAL’s insolvency Working Group V, although they depart in some respects in whether they provide a robust and comprehensive enough framework in support, and they do not deal with personal insolvency, an almost universal issue in MSME operations and failures.[1]

A recent research thesis[2] by an Australian lawyer, chartered accountant and representative at UNCITRAL WGV, Samantha Pacchiarotta, has made some useful recommendations for MSME reform in Australia, based upon the UNCITRAL and also Dutch reforms.[3]

Samantha Pacchiarotta and Cassandra Heaslip, UNCITRAL WGV, Vienna 2019

She has grouped these under the following six heads.

  1. Hybrid Debtor in Possession

A hybrid debtor in possession process, that is, with oversight and safeguards, assisted by DIP financing and some restrictions on secured lenders.

  1. Eligibility criteria

These need to be clear, ensure access to the process and appropriately balance the reduced entry requirements against abuse. While the World Bank advocates for an ‘open access’ approach to a regime for MSMEs, she cites Australia’s Mark Wellard that this ‘might be a step too far for a [creditor-friendly] jurisdiction such as Australia’.[4]

Pacchiarotta recommends a criterion based on complexity, largely referable to debt.

Significantly, she suggests a focus on viability (positive) rather than insolvency (negative) in part to reduce the stigma associated with insolvency.  That would be assisted by artificial intelligence (AI) which she notes “is rapidly becoming an essential tool in ascertaining business viability” and in particular in relation to assessing large amounts of information where time and resources available to understand the business are limited.  AI can be used to assess an MSE’s ability to innovate and adapt to changing market conditions like those posed by COVID-19.

She notes the potential use of AI to streamline the entry process has the potential to achieve time and cost efficiencies by quickly distinguishing between MSEs that are insolvent and those that are capable of being a viable business. With the imminent introduction of the Director Identification Number (DIN), company and director information will be readily accessible by creditors, which will also raise confidence in the process.

Other ideas include the “Solvency Health Check” app[5] to provide ‘industry-specific databases of insolvency indicators or risk factors’ for MSMEs. ‘The proposed app aims to encourage early intervention by enabling the MSE, creditors and other stakeholders to access real time analytics and diagnostics testing to provide timely alerts of approaching insolvency.’

3. Communications etc

Rather than adopting an opt-in position, there should be a default requirement to use technology for communication with stakeholders, for holding virtual meetings, in voting and for submission of documentation. That is, digital by default.

4. Oversight

UNCITRAL sees a DIP process as needing the oversight by an administrative authority, a court or administrative body.  Under the new UK process, the monitor is an officer of the court, through which the process is passed. Singapore has proposed an administrative focus through its Official Receiver.  Pacchiarotta suggests the Official Trustee in Bankruptcy as a Government Restructuring Monitor (GRM) to filter those seeking access to the process, with the Official Trustee having direct experience in high volume SME insolvencies. Given that ‘the COVID-19 pandemic has resulted in growing support of a government liquidator to administer a streamlined external administration of MSEs’, it could have a separate role as government liquidator.

The GRM would be responsible for the verification of MSMEs’ eligibility and the plan itself, dealing with creditor objections and either the implementation and monitoring of the plan or converting to a liquidation and confirming the MSE’s discharge.

5. Independent restructuring professional

But the GRM may itself appoint an independent restructuring professional (as opposed to the debtor/creditors appointing), based on Dutch law. That is, the debtor and the creditors would be able to request the appointment of an IRP and the GRM would then appoint the next IRP on its list.  The IRP would assist in preparing and negotiating a viable restructuring plan and assisting with its implementation. This seems to also accord with recent Singapore law reform proposals. She suggests their independence be secured by having a “first cab off the rank” appointment arrangement, and that liquidators would have the most appropriate skill set.

6. An education function for MSMEs

This is an on-going recommendation in many such submissions, as with UNCITRAL; whether an event like COVID-19 is the best place to learn is another matter.

Thoughts?

The thesis is timely given Australia’s position and highlights a collective thought process at UNCITRAL from comparable jurisdictions, all largely facing similar issues in MSME insolvencies.  It will assist consideration of the law reforms Australia is presently considering.

Michael Murray[6]

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[1] See A simplified insolvency regime tailored to the needs of small debtors or The insolvency of micro, small and medium-sized enterprises (MSMEs), UNCCA Fifth Annual May Seminar 2019, Canberra, Michael Murray. UNCITRAL’s Working Group V – Insolvency, is nearing completion of guidance on principles for the laws concerning the insolvency of MSMEs for its member states. Australia does not attend UNCITRAL WGV sessions but UNCCA has representatives attending the proceedings and reporting back, including to the government.

 

[2] To the rescue: An investigation into an effective restructuring regime for Australian micro and small-sized enterprises by Samantha Pacchiarotta, Maastricht University, 31 August 2020. The thesis pre-dates the Australian reforms. She refers extensively to ‘Instrument of the European Law Institute – Rescue of Business in Insolvency Law’ (2017) 365, by Bob Wessels and Stephan Madaus.

[3] See ‘Guiding the way: recent developments in UNCITRAL’s simplified insolvency regime’ (2020) 20(6) INSLB 98 by Samantha Pacchiarotta and the Griffith law student attending with her, Cassandra Heaslip.

[4] Mark Wellard, ‘World Bank report on MSME insolvency: Implications for Australian law reform’ (2018) 30(4) ARITA Journal 20.

[5] See Jennifer Dickfos, ‘AI and the Insolvency Profession: The State of Play’ (2018) 24(4) Insolv LJ 179

 

[6] Chair, Expert Advisory Committee, UNCCA

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